Customer Acquisition Cost for SaaS, Benchmarks + How to Calculate & Improve it
18 mins readMar 21, 2023
Customer acquisition cost for SaaS(CAC) is a metric that has been growing with online businesses mostly SaaS-based and web-based advertising campaigns that needs tracking.
As you may know, CAC is the cost of convincing a potential user to buy a product or service—offering clear view on how much it costs to acquire a customer and can help businesses determine the effectiveness of their sales and marketing efforts. By comparing CAC to the average lifetime value of a customer, companies can also determine if their customer acquisition efforts are profitable.
Improving CAC requires a holistic approach that takes into account various factors such as optimizing marketing channels, improving conversion rates, and reducing customer churn. Targeting the right audience with the right message through effective marketing campaigns can help reduce CAC. Improving the user experience and providing excellent customer service can also increase conversion rates and reduce customer churn, thereby improving CAC.
The read of this blog will elaborate the CAC metric in more detail, how you can measure it, and what steps you can take to improve it.
The cost per customer acquisition (CAC) metric is important for two key parties: businesses and investors. For early-stage people in business, use CAC to evaluate the scalability of new SaaS-based businesses operating in the internet space. By comparing the costs involved in acquiring a customer and the revenue generated, investors can gauge a company’s profitability.
For instance, in the upstream oil market, the extraction cost may exceed the market price per barrel if the oil reserves are located in an area requiring significant infrastructure investments.
SaaS-based business work under the same lens. SaaS businesses or marketing specialists are the other key party interested in the CAC metric. They use this metric to optimize their advertising investments and improve their return on investment. Simply put, if the costs of acquiring a customer can be reduced, the company’s profit margins will improve, leading to greater profitability.
Investors tend to provide companies with the necessary resources, while partners are committed to growth. The improved profit margins can be used to deliver greater value to customers, thereby securing a stronger market position.
For every business calculating cost per customer acquisition is different. Therefore it is important to know how to calculate CAC for different businesses. Once you understand how to calculate CAC, you may want to understand its impact on your business. Here are some use-case scenarios where understanding and managing CAC can make a significant impact:
- Startups: Keeping CAC low is essential for startups, especially in the early stages when cash flow is tight. A high CAC can quickly drain available resources, and it could take longer to achieve profitability. Startups should focus on cost-effective marketing channels and strategies, such as social media marketing, content marketing, and referral programs.
- Subscription-based businesses: CAC is essential for subscription-based businesses, where customer acquisition is just the beginning of the revenue stream. These businesses need to balance the cost of acquiring new customers with the expected revenue from their subscriptions. A high CAC can make it difficult to generate profit from subscriptions, so these businesses should focus on retaining customers for longer periods.
- E-commerce businesses: For e-commerce businesses, the CAC formula can be a bit more complex, as it needs to factor in the cost of goods sold (COGS) in addition to marketing and sales expenses. These businesses need to focus on improving their customers’ lifetime value (LTV), as a high LTV can offset a higher CAC.
- B2B companies: In B2B companies, the sales cycle can be longer, and there are often more decision-makers involved in the buying process. As a result, CAC can be higher for B2B companies. These companies should target the right customers and optimize their sales process to reduce the sales cycle length.
- High-growth companies: For high-growth companies, managing CAC becomes even more critical. As the company grows, it can become more difficult to maintain a low CAC while acquiring a high volume of customers. These companies should optimize their marketing channels and identify new channels for customer acquisition.
The cost per customer acquisition (CAC) is a vital metric for any business, as it helps determine how much a company spends on acquiring a new customer. This metric is calculated by dividing the total cost spent on marketing, advertising, and other expenses to acquire customers by the number of customers acquired in a specific period.
For instance, if a business spends $100 on marketing and acquires 100 customers annually, its CAC is $1.00. However, it’s crucial to be aware of certain factors that can affect the accuracy of this metric.
For example, a company might have invested in marketing a new region or early-stage SEO that may not yield results later. Such cases can impact the relationship when calculating the CAC. Therefore, it’s suggested to perform multiple variations to account for such situations.
However, we’ll provide two examples of calculating the CAC metric in its simplest form. The first example (Company 1) has a poor metric, while the second (Company 2) has an excellent one.
Example 1: Suppose a company spent $100,000 on marketing and acquired 500 customers yearly. The CAC for this company would be $200. This is considered a poor metric, and the company may need to revisit its marketing strategy to reduce its CAC.
Example 2: Suppose another company spent $100,000 on marketing and acquired 1,000 customers yearly. The CAC for this company would be $100. This is a great metric, and the company can focus on scaling its marketing efforts to acquire even more customers at a lower cost.
To explain the cost-per-customer acquisition (CAC) concept for e-commerce businesses that sell organic food products. The company invested $100,000 in advertising the previous month and claimed it attracted 10,000 new orders—it suggests a CAC of $10, but the figure alone is insignificant.
If a Mercedes-Benz dealer had a CAC of $10, the management team would be thrilled with their annual financial statements. However, for this organic food company, the average order value is $25, with a markup of 100% on all products. This means that, on average, the company makes a profit of $12.50 per sale and earns $2.50 from each customer to cover various overheads, such as salaries, web hosting, and office space.
While this is a rough estimate, it is essential to consider the customer’s lifetime value (CLV) to calculate CAC. CLV is designed to understand the CAC metric for a company better. You can find CLV calculators easily by using your preferred search engine.
For instance, a CAC of $10 may seem low if a customer makes a $25 purchase every week for 20 years! However, in the case of this e-commerce company, most customers only make a single purchase, and the business struggles to retain them.
Let’s look at another example to understand how a company can calculate its cost per customer acquisition (CAC). This example will examine a cloud-based customer relationship management (CRM) software company. The software is distributed online, and customers require minimal support, which means the company’s distribution costs are low.
Moreover, it has managed to retain its customers because transferring contacts, tasks, and events from the existing CRM software to a new one is cumbersome. The company has worked hard to boost its search engine rankings and has a team of sales support experts who work from call centers in a rural Midwestern town for a minimum wage.
The company has also established several strategic partnerships that provide a reliable stream of customers. In fact, it spends only $2 to acquire a new customer with a lifetime value of $2,000. Let’s take a closer look at the calculation:
- Total cost of sales support call centers for new customers: $1,000,000/year
- Total cost paid to strategic alliance partners per customer: $1.00
- Total monthly spending on search engine optimization: $20,000/year
Total new customers generated in the year: 1,020,000Customer acquisition cost: ($1,020,000 / 1,020,000 customers) + $1.00 per customer = $2.00Using a customer retention formula, this company has calculated its customer lifetime value (CLV) to be $2,000.This implies that for every $2 spent on acquiring a new customer, the company earns $2,000 in revenue. This is a promising sign for investors and indicates to the marketing team that the company’s system is effective.
It’s essential to remember that this calculation may not apply to every company or industry. Other metrics, such as return on investment (ROI), may provide a better understanding of a company’s performance.
Let’s take a look at a few examples of how to calculate customer acquisition cost (CAC) for different types of businesses.
Now, let’s consider a consumer goods company. Suppose this company spends $5,000 on sales and $1,000 on marketing to attract 1000 new customers. To calculate the CAC, you can use the formula:
CAC = ($5,000 + $1,000) ÷ 1,000 = $6
For a manufacturing company that sells building materials, let’s say they spend $10,000 on marketing and $5,000 on sales but acquire only 200 new customers. To calculate the CAC, you can use the formula:
CAC = ($10,000 + $5,000) ÷ 200 = $75
Lastly, consider a real estate company that sells duplexes. This company spends $25,000 on marketing and $10,000 on sales, resulting in 70 new customers. To calculate the CAC, you can use the formula:
CAC = ($25,000 + $10,000) ÷ 70 = $500
It’s important to note that these examples are just a few of the many scenarios that a business may encounter. CAC calculations can be customized and tailored to the unique needs of each business. By regularly tracking and analyzing CAC, companies can identify areas for improvement in their marketing and sales strategies.
As a marketer, you’re likely interested in knowing each marketing channel’s customer acquisition cost (CAC). Understanding which channels have the lowest CAC can help determine where to focus your marketing spend. By allocating your budget to lower CAC channels, you can acquire more customers for the same amount.
The simplest way to calculate CAC is to collect all your marketing receipts for a specific period and add up the amounts by channel. For example, you can create columns for “PPC” or “Pay-Per-Click” and “Inbound Marketing Costs” and input the relevant expenses.
However, this approach can be problematic because it assumes that each channel is equally effective in acquiring customers. It can be difficult to determine which channel is responsible for which customers, especially if you run a limited test for one channel.
For instance, you have decided to run a PPC campaign under a budget of $10. Seeing the spreadsheet, it might appear that PPC is the most effective marketing channel due to its exceptionally low cost of customer acquisition (CAC). However, you may want to wait before doubling down on PPC; as for now, you don’t have a comprehensive picture of the channel’s performance under the given time.
For e-commerce businesses selling physical products, it is very easy to know the results a PPC campaign may generate—for instance, leading to direct sales. To better understand each channel’s effectiveness, you can use tools like customer analytics to trace paying customers back to their last “touch attribution source”. This will help you identify the last channel the customer visited before making their first purchase with your online business
.For instance, if a customer found your business through an organic search, you would know that SEO was responsible for their acquisition.
Some marketers believe that each marketing channel supports the next channel in a combined effort, and all channels work together to bring in customers. Others prefer to rely on the last-touch attribution model for their CAC calculations.
When calculating the cost per customer acquisition (CAC), it is important to include all relevant costs to get an accurate picture of the investment required to acquire a customer. Here are some of the types of costs that should be considered when calculating CAC:
- Marketing Costs: This includes all costs associated with marketing activities such as advertising, content creation, search engine optimization (SEO), email marketing, social media marketing, and events.
- Sales Costs: This includes all costs associated with the sales process, such as salaries and commissions for sales representatives, sales training, and software or tools used to manage the sales process.
- Overhead Costs: This includes all other indirect costs associated with acquiring a customer, such as rent, utilities, office supplies, and other general expenses.
- Technology Costs: This includes all costs associated with the technology used to acquire customers, such as website hosting, landing page software, email marketing software, and any other software or tools used to manage the marketing and sales process.
Here are some ways to improve customer acquisition cost for SaaS:
- Refine your targeting: Make sure you’re targeting the right audience with your marketing efforts. Conduct market research to understand your ideal customers and tailor your messaging and advertising to reach them.
- Focus on content marketing: Produce high-quality content that educates your target audience and positions your brand as a thought leader in your industry. This can help attract potential customers and drive organic traffic to your website.
- Leverage social media: Social media platforms are a great way to connect with potential customers and build brand awareness. Use targeted advertising on social media to reach your ideal customers and engage with them through social media marketing campaigns.
- Optimize your website: Make sure your website is optimized for search engines and provides a great user experience. This can help improve your search engine rankings and increase the likelihood of potential customers finding your site.
- Optimize your conversion rate: Simplify your website’s user experience and make converting visitors into leads and customers easy. Optimize your site for mobile users, test different website copy, and create a frictionless sales process to make it easy for visitors to buy from you.
- Add value: Increase customer value by understanding their needs and providing what’s valuable to them. Collect customer feedback, and use it to improve your product offerings, features, or complementary products that can keep them coming back for more.
- Implement a customer referral program: Referral programs are an effective way to acquire new customers at a lower cost. By incentivizing your existing customers to refer new customers to your business, you can acquire new customers at a lower cost and increase customer retention rates.
- Improve your sales funnel: Analyze your sales funnel to identify areas where potential customers might be dropping off. Improve your sales process to address any issues and make it easier for customers to convert.
- Streamline your sales cycle: Use customer relationship management (CRM) and prospecting tools to connect with qualified leads more effectively and shorten the sales cycle. This will increase the number of sales you can influence over time, leading to a lower CAC.
Q: What is a good CAC for SaaS?
A: A good customer acquisition cost for SaaS depends on your business model and industry. However, most SaaS companies aim for a CAC to lifetime value ratio of 3:1.
Q: How can I reduce my CAC for SaaS?
A: You can reduce your customer acquisition cost for SaaS by focusing on reducing churn, optimizing your sales funnel, and increasing lifetime value.